In part one I described how the Big Six shot themselves in the foot with Amazon in the beginning of all this. Let’s talk about what’s happening now.

We all know that the Big Six got caught colluding with Apple to allegedly force the agency model and fix pricing. The DOJ will sort all that out and I don’t think the outcome is going to surprise anyone. I really don’t see the need to beat on this subject anymore. But the question of why this all happened to begin with still seems to be a murky subject.

What are the Big Six most afraid of? What drove them to do what they did and attract the attention of the DOJ? What drove them to partner with Apple and collude on pricing?

The word Monopoly gets thrown around a lot when this subject comes up, but I don’t often see it being used in its true sense. A monopoly exists when an individual or corporate enterprise is the sole supplier of a particular product or good. There also has to be no viable substitute for the product. By this definition Amazon is not a monopoly as there are several resources one can use to obtain books. Whether you’re a retailer or a customer, you still have options. As long as there are bookstores and other online retailers of books, Amazon cannot be considered a monopoly. Amazons current place as the leader in the market is not in dispute, but they do not, at this time, fit the definition of a monopoly.

Besides, Amazon being a monopoly is not what the Big Six are acutely afraid of.

Huh?

Stick with me. A monopoly is a consumer sided problem. If the consumer has nowhere else to get the desired product he is stuck with whatever price and quality that the monopoly wish to provide. He has no options; the company has him locked in. This is the small town/Standard Oil/ Wal-Mart story you see told over and over as an example.

(BTW, if you own a Kindle and have no pirate skills, Amazon is a monopoly to you. Sorry.)

What the Big Six are more afraid of is a Monopsony. A monopsony is a market where only one major buyer exists. Despite the number of sellers, the monopsony is now the dominant factor in the market, and as such, they have all the leverage. They can now dictate terms to the suppliers (publishers) the same way a monopoly controls the buyers market.

The Big Six are afraid that Amazon will become such a dominant force in the retail book trade that they will have no choice but to agree with whatever terms they offer. If Amazon attains such a position, they can control the Big Six profit margins, making them razor thin, or if they desire, eliminate them altogether, resulting in the death of the publisher.

This also affects the other retailers (bookstores) in a compounding fashion. When they can’t meet the competition, more bookstores and other online retailers will close. This in turn gives more leverage to the dominant company to continue the practice. It becomes a snowball rolling downhill. Nobody even needs to push it anymore; it just keeps growing and growing as it travels. I’m not even sure it can be stopped at this point, but that’s another topic we can tackle later.

So, with that all said, is this Amazons goal? Are they the evil empire out to take over the world of publishing as a lot of bloggers are saying? Or are they the rebel alliance here to free the authors from their oppressing overlords? Or is there a third option, some form of hybrid model perhaps?

When faced with this question and others like it I look for two things; previous actions and numbers. Neither of them lies and there’s usually little room for argument.

In Part 1, I quoted Jeff Bezos from a Wired magazine article that ran in December of 2011. I’ll throw it out here again;

“We are culturally pioneers. We like to disrupt even our own business. Other companies have different cultures and sometimes don’t like to do that. Our job is to bring those industries along.”

I think you could add “if they want to or not.” onto the end of that quit easily, but the key word in that quote is disrupt. The internet is a powerful tool for disruption. When used properly, the internet serves to remove the intermediary, otherwise known as “cutting out the middleman.” A company that manages to do this can now deal with the customer directly. They have bypassed the normal distribution route. Bezos targeted the publishing industry for the simple fact that it was ripe for disruption. The internet makes it very easy. By not warehousing and ordering the product direct from the supplier after the customer has ordered it, he eliminated several layers of operating cost.

Old wayAmazon way

Product is produced Customer orders product

Product is shipped to Retailer Amazon orders product from Supplier

Retailer warehouses the product Supplier delivers product to Customer

Customer orders product

Retailer delivers product to Customer

With Amazons method there are no retail storefronts, no warehousing, and a fraction of the shipping. Their storefront is a computer screen, their warehouse is a cloud database, and their shipper is UPS. If there’s any warehousing it’s done by the supplier. With no retail space or employees, minimum warehousing, and leveraged shipping charges, Amazon is able to operate with minimum overhead. This allows them to buy wholesale and sell retail, at a huge discount. Something the other retailers (that would be you B&N) could never hope to compete with. Combine this with some predatory pricing and you have your evil empire.

But here’s the kicker; Amazon has the potential to do this on a world-wide capacity. They are attacking on two fronts; from the wholesale monopoly side of the equation and the retail monopsony side as well.

So is Jeff Bezos the Darth Vader of the online retail world? No, not yet, and I don’t really think he wants to be. He’s more of an Anakin Skywalker right now, if you’ll pardon the geeky analogy. If Amazon were to become a monopoly it would bring down the wrath of the DOJ. He doesn’t want to be Microsoft and have DOJ lawyers crawling through his business for the next fifteen years, nor does he want to become Ma Bell and have Amazon broken up into pieces. He’s too damn smart for that.

How smart? Consider this; the Kindle you buy today contains the Mobi format and a web browser for downloading e-books. Common knowledge. But what most people don’t know is that it also contains PDF, TEXT, Audio, and something called Topaz. A simple upgrade would make it E-pub compatible. Someone was obviously thinking far down the road from the very beginning.

So let’s do some numbers. I’m not a stats guy, but I know enough to spot creative statistics when I see them. I’m not going to show my math here because I want to finish this entry sometime this year. So if your numbers don’t match mine that’s fine, it’s the flavor I’m trying to portray here, not absolutes.

Amazon has somewhere between 70-80% of the e-book retail market.

The e-book market is growing exponentially, from less than 1% of the total market in 2008 to around 40% in 2011. It’s expected to take another jump in the first quarter of 2013.

Amazon won’t reveal how many Kindles it has sold, but it’s safe to assume that it’s the dominant e-reader on the market. It’s estimated to be around 70%. (To reveal the true number would be a huge mistake on Bezos part, it would simply give a big gun to the monopoly crowd.)

Border’s has closed all of its stores. Barnes & Noble are struggling, closing 200 stores in the last year. They can’t find an investor, even at 60 cents on the dollar. B&N stock traded at $47 a share in 2006, it’s now trading for around $9 a share.

I mentioned actions earlier. Let’s take a look at that. Amazon has the dominant position in the publishing world. I don’t see anybody really arguing with this. They have significant leverage and have been increasingly using it.

Some examples;

While negotiating with MacMillan during the first big agency debate Amazon pulled all MacMillan e-book titles from their store, only to suddenly give in shortly after. Do you think Bezos realized what was happening and caved, knowing agency would come back to haunt MacMillan?

Recently, Independent Authors group (IMG), a large distributor for authors and indie presses, had all 5,000+ of their books pulled from the Kindle library. The print versions stayed up for sale. The reason for this was that their e-book contract was up with Amazon and IMG wished to renew it with the same terms. Amazon demanded a deeper discount. When IMG balked, the titles were pulled. By which party is not specified. They have since solved their differences.

What’s this all mean? It means Amazon has a big stick and they aren’t afraid to swing it. They can afford to take a hit and leave money on the table far more than the publishers can. If it comes down to a staring match, Amazon will always win.

Evil empire or just good business? In my opinion Jeff Bezos has not crossed to the dark side yet, at least in a legal definition. He has the framework and the intelligence to make Amazon the global retail force he has envisioned. The truly stupid decisions that the publishers have made in the past, coupled with their inability to see the big picture, have made it incredibly easy for Amazon to obtain the position they are in now. The DOJ lawsuit is just another example of this. The proposed settlement reads like it was written by Bezos himself. He basically got everything he wanted short of the Most Favored Nation clause, something he knew he was going to loose anyway. But that’s for another post.

The biggest challenge I see for Amazon is to not overshoot. To avoid that will require Bezos to fight human nature. He needs to find that sweet spot that gives him the leverage he needs without falling into the definition of a monopoly. I’m sure he has a market percentage target that he’s hoping to hit without going over. If he does overshoot, the competition will collapse, and Amazon will become a monopoly whether it intended to or not. The next day the DOJ will be knocking on his office door.

It’s the ultimate showcase showdown.

So what does this all mean for indie authors? I’m getting to that, I promise.